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Fool on the Street: What's in Store for Starbucks

There's been lots of negativity about the coffee giant here lately, but should investors expect more?

Here at The Motley Fool, we believe individual investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment-bank conferences with major companies and are giving you the rundown. We call this feature "Fool on the Street."

Starbucks (NASDAQ:SBUX) recently presented at the J.P. Morgan Gaming, Lodging, and Restaurants Conference. We thought it might be enlightening to take a peek at what the coffee giant's chief financial officer, Michael Casey, had to say about the company's outlook and plans.

More soul foodOK, the whole "soul" controversy might be getting a bit old, and the company has spent plenty of time scrambling to explain what it all meant (not to mention all the time the media has kicked the idea around, too). Although Starbucks Chairman Howard Schultz recently tried to clear up the matter at the company's annual meeting, Casey also addressed the incident at the J.P. Morgan conference.

"It was never Howard's intention to in any way alter the growth trajectory of the company," Casey said. "He was simply doing what any great executive does in the natural course of business, and that's something that he's done dozens of times before. He was communicating with his leadership and challenging us to stay focused and true to our core; to continue seeking opportunities for engagement and connection to our customers; to remember what has made and continues to make the company great; and to never lose the hunger, the drive, and the desire to raise the bar, innovate and deliver the Starbucks experience day in and day out."

More productivityAnybody who follows Starbucks probably already knows much of the information that was shared. However, some of the data is worth repeating. For instance, Starbucks plans to open 10,000 stores in the next four years, double the size of the business in the next four to five years, and continue to increase earnings faster than revenue as it marches along its journey to an ultimate goal of 40,000 stores. As it stands now, Starbucks serves about 44 million customers each week.

I've noticed some hand-wringing lately about Starbucks cannibalizing itself with its rapid store openings, although I can't help but laugh to myself, because the "cannibalization" theory has been circulating for about as long as Starbucks has been on investors' radar. Furthermore, Casey addressed what he called "conventional wisdom" that might suppose newer stores are less productive because store numbers have increased, stating that productivity has actually been improving.

Casey said that first-year sales for Starbucks stores opened in 2000 were approximately $630,000. Compare that to forecast first-year sales for stores opened in fiscal 2006. That figure clocks in at about $920,000. Casey said that while investment is slightly higher in the newer stores, with some being drive-through models, the first-year sales to investment ratio is 2.2 to 1, beating the company's targeted 2-to-1 model.

More brandwashingCasey also talked about Starbucks' global consumer products group segment, which focuses on coaxing customers outside of Starbucks stores. This segment includes its lines of products commonly found in grocery stores. Starbucks has agreements with other companies to license and distribute these products in these channels. Pepsi (NYSE:PEP) distributes Starbucks' bottled Frappuccino drinks and Starbucks Double Shot espresso drinks, and Kraft (NYSE:KFT) does the same with Seattle's Best, Tazo tea, and of course, the Starbucks beans you find on grocers' shelves.

Casey said the ready-to-drink coffee business outside Starbucks stores drummed up 550 million transactions last year in the U.S. alone. Starbucks' "ready-to-drink" options overseas seem to have some promise, too. I may have had my doubts when I heard Starbucks was launching a ready-to-drink line in Japan with Suntory in May 2005, having heard there was already a crowded market for ready-to-drink beverages there, but apparently the product (called Starbucks Discoveries) has been doing well, selling 44 million beverages in a little more than a year.

Casey calls this "brand interaction," and of course this can be a double-edged sword. On the one hand, constant exposure in different channels could water down the brand. On the other hand, it could help supplement its customers' thirst for its products on the go, as well as possibly seducing new customers into its shops.

More cowbellOK, so I was running out of ideas for "more" subheads. If you remember the SNL skit with Christopher Walken ribbing on VH-1 and Blue Oyster Cult, stating with emphasis, "I gotta have more cowbell!", then you know why it's funny. But I digress -- obviously Starbucks has nothing to do with cowbells.

Casey's presentation didn't leave much time for audience questions. However, there was one on a well-publicized concern, and that is whether Starbucks is running scared from very pointed competition from McDonald's (NYSE:MCD) and Dunkin' Donuts.

So far, Casey said Starbucks has not seen an impact from new, well-publicized brews from the Golden Arches, but he also said it's too early to have any observations about McDonald's espresso beverages. However, as for Dunkin' Donuts, he said, "We clearly have not seen any impact from Dunkin' Donuts' efforts to introduce espresso beverages and to upgrade their coffee. In fact, our business has been strong in markets where they're doing that."

He went on to say that the more educated consumers are about the joys of high-quality coffee, the better it is for all the participants in the business. Perhaps you could call it a "halo effect" for Starbucks whenever customers are introduced to specialty coffee of any type, because maybe, just maybe, that means those customers will decide to try its wares.

At any rate, Casey reiterated the belief that Starbucks has key differentiators in that its business is so often unique. I think that is the crux of the problem investors have been having with Starbucks these days -- they are allowing themselves to fret that its success can be easily replicated. However, when you look back on the course of the history of Starbucks and its astounding growth, it's worthwhile to remember that this isn't exactly a new or original concern, and Starbucks' dominating brand doesn't seem to have been undermined yet.

Author

Alyce Lomax is a columnist for Fool.com specializing in environmental, social, and governance (ESG) issues and an analyst for Motley Fool One. From October 2010 through June 2015, she managed the real-money Prosocial Portfolio, which integrated socially responsible investing factors into stock analysis. Follow @AlyceLomax